Market Briefing: Markets flatline into consumer price report
The dollar is trading near a three-month low, and implied volatility in equity and currency markets is sitting at remarkably-low levels ahead of this morning’s consumer price data, suggesting that investors don’t think the report will impact the Federal Reserve’s tightening trajectory in any dramatic way.
Headline prices are seen rising 3.1 percent in June from a year earlier, decelerating sharply from 4 percent in May and 9.1 percent at the same time last year. With food and energy prices excluded, core inflation is expected to come down to 5 percent from 5.3 percent in the prior month. Extrapolating from weakness in the closely-watched Mannheim Used Vehicle Value Index, second-hand car prices could tumble 1.2-1.5 percent in the month, and the Zillow Observed Rent Index is pointing to a moderation in rent increases.
After extensive telegraphing from policymakers, market-implied odds on a quarter-point hike at the Fed’s July meeting are holding near the 92-percent mark - as close to certainty as exists in rates markets. The VIX equity “fear index” is back below the 15 threshold, trading at levels seen before the pandemic hit in 2020.
But we would warn that US inflation prints - like virtually all economic data releases in the post-pandemic era - still carry the capacity for surprise. If inflation pressures fail to subside, with month-over-month increases topping the 0.3-percent level, policymakers will be forced back onto a hawkish rhetorical footing, and rate expectations for the autumn months could ratchet back up. Alternatively, a softer-than-anticipated report might demolish odds on post-July hikes and trigger a “melt up” across financial markets.
Across the Pacific, bets on a surprise from the Bank of Japan seem to be driving some unexpected currency appreciation. The yen broke back through the 140 mark against the dollar last night, with many market participants arguing that an adjustment in the central bank’s yield curve control policy could come at the end of the month. This may be true, but we think there could be other dynamics at play, with traders seeing the yen as a hedge against a “hard landing” in the global economy - the currency has traditionally outperformed during periods of extreme market stress, and could rally if central banks manage to tip the world into recession later this year.
Commodity futures are slightly stronger on expectations for a more concerted stimulus push from Chinese policymakers, with industrial metals climbing as confidence in a rebounding construction sector begins to build.
The Canadian dollar is treading water ahead of the Bank of Canada decision at 10:00 this morning. Markets - and economists - think policymakers will respond to signs of overheating in labour conditions, consumer spending, and real estate markets by delivering a second consecutive rate increase. The move to 5 percent might be the last in this tightening cycle, but officials are likely to use the accompanying statement and monetary policy report to express a relatively hawkish outlook, with growth seen persisting for longer, and inflation coming down to target over an extended time horizon. The last consumer price report showed headline inflation coming down to 3.4 percent year-over-year while an average of preferred core measures held at 3.7 percent, well above the Bank’s comfort zone.
Please note: We will not be issuing a Market Wire after this morning’s US consumer price print due to a scheduling conflict, but will be back in your inboxes shortly after the Bank of Canada decision.
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